The Morning Risk Report: Targeting Bad Actors

Wall Street Journal

As any regulator or corporate officer will tell you, there’s nothing like a “perp walk” of an alleged white-collar criminal from abode to waiting police vehicle for sending a message about the personal cost of nefarious individual conduct.

Regulators in the U.S. and U.K. are looking for ways to send that message. Mary Jo White at the Securities and Exchange Commission said Tuesday the agency would sometimes require individuals to admit wrongdoing when settling civil charges. The U.K. Parliamentary Commission on Banking Standards, responding to a string of scandals in the local banking industry, called in a report published yesterday for criminal sanctions on bankers engaging in “reckless misconduct.” This all continues a theme from the Sarbanes-Oxley Act of 2002, which required top managers to certify the accuracy of their company’s financial reports.

For compliance staff the focus on individuals cuts both ways. They can point to the risk of individual indictment as a way to reinforce their internal message. At the same time it’s harder to counter the influence of rogue individuals than flawed policies and if stiffer penalties are applied to those individuals then the collateral damage on companies will be greater.

The U.K. parliamentary report certainly pulls no punches but it also shows an awareness of the negative effects that can stem from unwise regulation. It rejected a proposal that directors of failed banks be barred from the industry as having possibly “perverse and unfair” results (clause 239). It also rejected the idea of interim bans on those who are the target of enforcement. For small financial firms “having a key individual prohibited for even a short period might cause irreparable damage to their reputation,” it said (clause 241).

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EXCLUSIVE ON RISK & COMPLIANCE JOURNAL:

Compliance more costly for smaller firms, study finds. The cost of compliance is far greater at small companies, according to a new survey, costing some $102 per employee for firms with fewer than 2,500 people, compared to $23 per head at companies with 50,000 or more employees. The survey, released Wednesday by compliance consultant LRN Corp., found compliance costs for highly-regulated industries were far more costly. The healthcare, financial services, defense, energy, insurance, pharmaceuticals and medical devices industries spent $55 per employee, compared to $35 per employee for less-regulated industries. Highly regulated industries employed three times as many full-time compliance staff than their less-regulated peers.

Former TigerDirect President Indicted in $230 Million Laundering Scheme. The former president of a unit of Systemax Inc. was indicted in New York federal court on seven counts of fraud and money laundering charges. Carl Fiorentino, who was arrested in Coral Gables, Fla., allegedly took more than $7 million in bribes and kickbacks in exchange for steering more than $230 million in business to the Taiwanese and California companies that made the payments.

UK to Charge Sun Reporter, Prison Officer in Operation Elveden. U.K. prosecutors said Tuesday they will charge a Sun journalist and a prison officer over bribes paid to the officer for information. Prosecutors said Nick Parker, a reporter for the Sun, paid Lee Brockhouse, a prison officer, for information that included prison procedures and methods used by inmates for smuggling items into jail.

Report Lists Worst Countries for Human Trafficking Abuses. Twenty countries received the worst possible ranking on the 2013 Trafficking in Persons Report released Wednesday by the U.S. State Department, meaning the department doesn’t think their governments are in full compliance with the Trafficking Victims Protection Act’s minimum standards and are not making significant efforts to get in compliance. China, Iran, Cuba, North Korea, Algeria, Central African Republic, Libya, Uzbekistan, Syria and Sudan are among the nations given the lowest Tier 3 ranking. Trafficking victims are forced to work as sex slaves, or lured to countries with the promise of legitimate jobs only to be forced into situations where they are forced to work long hours in factories, processing plants, on farms or fishing vessels for low or no pay and made to live in poor conditions where they are subject to beatings and rapes if they speak out against their conditions or try to escape. In some cases, children are forced to become soldiers.

COMPLIANCE

Swiss Parliament Rejects U.S. Banks Deal. The WSJ reports Swiss lawmakers ushered in a new era of uncertainty for the country’s financial sector Wednesday by nixing a proposal to let Swiss banks avoid the threat of prosecution in the U.S. by collectively coming clean about their dealings with suspected American tax evaders. Switzerland’s lower house of Parliament voted 123-63 against the measure, which would have enabled many of the Alpine nation’s banks to sidestep the Swiss banking secrecy laws and start handing information to the U.S. Department of Justice about any past help they may have given to Americans hiding undeclared wealth in Swiss accounts. Following its own vote earlier in the day, the upper house resolved to seek an alternative solution with the U.S. should the lower house reject the proposed plan—but offered no details as to what that might entail.

Market structure issues on SEC’s front burner. The WSJ reports flash crashes, high-frequency trading, dark pools of liquidity and market structure fairness are among the top concerns for Securities and Exchange Commission Chairman Mary Jo White. Equity market structure has been a major concern for chief financial officers since the May 6, 2010 “flash crash.” Despite the flash crash, some market experts say that high-speed traders help the market by supplying liquidity. Ms. White said she wants to study the practice, and other elements of market structure, to determine which of them are having an impact, and which impacts are “harmful.”

Legislators take aim at Dodd-Frank pay-ratio rule. The WSJ reports U.S. legislators moved forward with a proposal that could repeal a Dodd-Frank rule requiring companies to start disclosing the ratio of median employee pay to CEO compensation. Rep. Bill Huizenga (R., Mich.), who sponsored the bill, said the provision would be “a logistical nightmare for all public companies,” because they would have to calculate pay for all employees in the manner they currently do for their top five executives and disclose it in every SEC filing. Companies have complained it would be costly to accurately report the compensation of their median employee, amid concerns about how to calculate part-time employees, overtime, benefits, 401(k) matches and differences in the way employees are compensated overseas.

GOVERNANCE

SandRidge CEO Ousted, gets $90 million exit pay. The WSJ reports SandRidge Energy Inc. founder Tom Ward was ousted as the oil and gas producer’s chief executive and chairman, and will take one of the biggest severance packages seen in the energy industry, about $90 million. Mr. Ward came under fire last year for his high pay, the company’s weak stock performance and the company’s dealings with businesses controlled by his family member during a months-long proxy fight. Mr. Ward’s ouster wasn’t unexpected. SandRidge in March settled a proxy fight with activist shareholder TPG-Axon Capital LP, agreeing to either fire Mr. Ward or give control of its board to the hedge fund.

U.K. Mulls Breakup of RBS. The WSJ reports the British government is considering breakup of Royal Bank of Scotland Group PLC, a potentially radical move that underscores policy makers’ mounting frustration with their inability to arrest a five-year banking crisis. George Osborne, the U.K.’s chancellor of the Exchequer, said the Treasury “will urgently investigate” the case for splitting RBS—which is 81%-owned by the government after a 2008 bailout—into two separate banks: one housing the lender’s healthy assets and the other containing its hefty pile of troubled loans and securities.

AUDIT

Bill to ban PCAOB from forcing auditor rotation advances. The WSJ reports that a bill to ban the PCAOB from ever requiring mandatory periodic rotation of corporate auditors advanced out of the House Financial Services Committee and will move toward a full vote in the House of Representatives. The bill would prevent the PCAOB from “imposing rules that would cause significant disruption and financial cost to our companies,” Rep. Gregory Meeks (D., N.Y.) who co-sponsored the bill with Rep. Robert Hurt (D., Va.), said at the hearing. A mandatory auditor rotation requirement is “unworkable,” Mr. Meeks said, noting that most large companies already are limited to considering one or two of the “Big 4” auditors with expertise in their industry.

A History of Japanese Audit Firms, 1965–2010. The NEP-HIS blog reviews a history of Japanese audit firms and their expansion by merger, noting that a key concept in the study is ‘the social proof of competence’, where acquiring reputation, social status and symbolic outputs is more important than actual results/outputs. The review notes that the history’s authors found no evidence that expansion through mergers contributed to an improvement in organizational competence nor that it improved the quality of audit services (and reduce accounting fraud.

DATA SECURITY

Privacy officials world-wide press Google about Glass. Ten privacy officials from seven countries asked Google questions about privacy issues related to Glass, after Google’s chief executive, Larry Page, made his first public comments about the issue, reports the NYT. The officials raised fears of “ubiquitous surveillance” and asked about Google’s privacy safeguards, what it plans to do with the data the devices collect and how it is addressing “the broader social and ethical issues” raised by Glass.

Texas becomes first US state to ban warrantless email snooping. Naked Security reports that Texas has become the first US state to ban email snooping without a warrant. Governor Rick Perry signed the new privacy bill -into law on Friday. It went into effect immediately. The bill enacts a law that sets Texas residents apart from the other 49 states by protecting them from state and local law enforcement surveillance carried out without a warrant.

EU’s Cybersecurity Strategy gets harsh criticism from data protection advocate.Naked Security reports that a top EU data privacy advocate has criticized the European Union’s plans to combat cybercrime, saying they don’t provide enough protection for personal data. In the same statement, the European Data Protection Supervisor Peter Hustinx suggested that too little attention has been paid to existing regulations and agencies, and that it would be useful to have tighter definitions of what exactly the European Commission means by “cybercrime” and related terms.

Many executives express concerns about their existing cyber incident response plans, despite a number of high-profile breaches. The uncertainty surrounding cyber incident response presents an opportunity to educate the executive team on cyber resilience, the coordinated set of enterprisewide activities designed to help organizations respond to, and recover from, a variety of cyber incidents, while reducing their impact to business operations, cost and brand damage.

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Risk & Compliance provides news and commentary to corporate executives and others who need to understand, monitor and control the many risks that can tarnish brands, distract management and harm investors. Its content spans governance, risk and compliance and includes analysis of the significance of laws and regulations, the risks inherent in global expansion and the protective moves taken by companies.